Transpacific graveyard

Friday, November 04, 2011

Transpacific services are dropping away by the week as the liner carrier industry girds itself for the traditional winter slack season with some quite untraditional dynamics at work.
According to statistics from American Shipper liner research affiliate ComPair Data, 11 percent of eastbound transpacific capacity has been withdrawn since the start of July. There’s now an estimated 355,000 TEUs of weekly allocated capacity, compared to nearly 400,000 TEUs in early July.
The problem, from a carrier point of view, is clearly the period from the start of April until the end of June, a quarter in which weekly allocated capacity grew 16.6 percent. Carriers were no doubt prepping for a peak season that failed to materialize.
Earlier this week, American Shipper detailed the list of transpacific services that have fallen away since spring. Throughout the year, we’ve noted that services run with small vessels are particularly vulnerable to be axed since in low-rate environments they can’t make the slot costs work as well as those run with larger vessels.
Virtually all the service deletions have come from fringe carriers, or from established lines or alliances dropping services using their smallest ships. And any withdrawals that come from this point forward will be made in the name of winter rationalization, not rationalization full stop.
But reported spot rate levels show that simply picking the low-hanging fruit (i.e. marginal carriers or small-vessel loops fading away) won’t treat the real problem: way too much capacity from the major lines.
No one seems willing to blink for fear of sacrificing market share for the good of the rest of the industry. The liner industry is noted for its hubris, and nothing underlines this more than the third quarter financials that have come trickling in the past couple weeks.
The template works for nearly all the lines – big losses, lower revenue, but, hooray, higher volume. That’s a horrible equation and not one to be celebrated.

Just this week, Hanjin Shipping reported its volume was up more than 13 percent through the first three quarters. COSCO Container Lines’ volume is up 11 percent.
But Hanjin lost $315 million in operations through three quarters. COSCO’s container business had net losses of $330 million in the third quarter. What glory is there in beating global container volume growth (projected to be around 8 percent) if the consequences are huge losses?
The best performing lines will not be looking at beating industry growth, but at holding their revenue and profit per TEU carried stable.
According to ComPair Data, weekly allocated transpacific capacity at the end of October was 6.3 percent higher than at the start of the year. Believe it or not, that’s roughly in step with expected volume growth on the transpacific.
But here’s the problem with statistics. The yearly demand numbers are misleading because they mask a strong pre-Chinese New Year’s period and a weakening market ever since. Also, who’s to say that the 334,000 TEUs of weekly capacity on offer at the start of 2011 was the right amount for true supply demand-balance, the correct benchmark, if you will.
Rates tell a different, less optimistic story. And that’s not even counting the pressure that continued delivery of large vessels on the Asia-Europe trade will have on the transpacific. Just as small-ship services (meaning those run with 3,000-TEUs to 5,000-TEU vessels) are compromised on the transpacific, the next size category of ships are compromised on Asia-Europe. Which places those vessels in line to be potentially deployed on the transpacific. It’s a vicious circle that can’t be solved entirely by growth in niche trades that exclude North America and Europe.
So the question now is whether the services that have been pulled on the transpacific (and those that will be in the coming weeks) are mere short-term rationalizations, or a market-based balancing of what capacity the trade really needs. If demand is growing slowly, and if ships from Asia-Europe are being pushed into operational limbo, can small operators or small-ship services return to the trade anytime soon? It would take a brave person to bet so.